Why Your Firm Might Fail...and Preventing It

Forgive me for the ominous subject line of this email, but there are times when it's best to be objective and forthright. I've been talking with the executives of large associations and educational institutions in this field, hoping they'll drop the status quo and beginning offering real help to their members and graduates. So far I've made very little progress, so I'm just going to use my own platform (16,000+ of you).

Look around, think back through the last decade, and make a mental list of the firms you knew that are no longer around. Did any of them fail for lack of creativity? Even if you don't think they were that creative, the answer is a resounding "NO". Here is why those firms--and possibly yours, if you don't listen--will cease to exist, in descending order. I'm going to list seven reasons firms fail, and then seven things to keep a very close eye on.

What to Keep An Eye On

  • Make Poor Business Decisions. I'm thinking of things like leasing too much space, incurring debt instead of examining the issues behind why you need it, spending more than 45% of your AGI on compensation, establishing unnecessary satellite offices, ignoring standard embezzling safeties, and not really understanding what the financials are saying.
  • Let Growth Happen to You. This is the land of opportunity, as we're told from a young age, and so one of the most difficult decisions an entrepreneur must make is to turn down opportunity. By avoiding that, they let the marketplace determine how large they will be, in spite of all the additional management load that brings, and worse yet they match their capacity to their opportunity and forgo the ability to say no to clients who don't fit. Eventually they end up consistently accepting work to keep the butts in the seats busy, focusing on cash-flow rather than profit.
  • Get Tired of Employees. Few of you grew up yearning to manage people, fewer of you had any training, and almost none of you hop out of bed longing to get to the office and solve people issues. Some of that comes from doing a poor job of hiring. Even more of it comes from not fixing that first mistake, making a second one by keeping the wrong hire on too long. Longer than any of your staff thinks you should. The worst threat to your firm is that very skilled employee who doesn't fit the culture. The head scratcher, though, is why you keep someone who doesn't fit the culture AND is incompetent to boot. You aren't running an orphanage.
  • Get Tired of Clients. If I could write a (credible) book on How to Make Money Without Clients, I could retire in Chile (my favorite country these days). For some firms, clients are a necessary evil to fund their artistic exploration. For most firms they are critical partners who benefit from your expertise. But honestly, most of what you are doing is helping them sell shit the world doesn't need. You are obligated to them to do good work, and you are obligated to yourself to charge a lot, but in the end the demands, timelines, financial pushback, undisciplined decision making, and resistance to your advice is wearing. You have to make it work, somehow, recognizing that you are going to be swimming upstream most of the time, and that you are usually right in spite of their reaction.
  • Don't Change with the Times/Ignore the Future. Remember when everything went from manual labor to computerized assistance in the mid 1980s? I was in the field, then, and I saw many older practitioners suffer the consequences of not adapting to the times. Honestly, it was mainly based on embarrassment that they could not type. Well, we are now in the very middle of a sea change in which the middle class of firms (that's most of my clients) are slowly going to disappear. The best work will move up to the top firms with deep expertise that is not easily replaceable and most of the remainder will be pushed downward to a more transactional, manufacturing-minded environment where money is made via lower costs, greater efficiency, and volume aggregation. Helping in that regard will be the continued transition to semi-automated solutions (like MarcomCentral's PTI product) that are based on the premise every other industry is embracing: shifting the monkey work back to the customer.
  • Suffer a Client Concentration Event. Any time you have a related source of work that represents more than 25% of your AGI, the yellow light should flash. If that source crosses the 35% threshold, you are just as likely to go out of business as to recover when they leave. And it doesn't matter whether the related source is comprised of different contacts, because you won't lose the work because you screw up. You'll lose the work because there is a vendor consolidation (driven by those little people in procurement) or an acquisition of the mother ship.
  • Partner Disputes. Kids are lost when the parents aren't on the same page, and employees are too. Worse, nothing of real significance gets done, because positioning, marketing, and sales are only effective if they spring from an authentic, engaged group of people who are rowing together. If you start disagreeing, hire someone like me who can facilitate honest discussion, paint the options,and help each partner respectfully make the right transition for the good of all involved.

How to Live Happily Ever After

How do you improve your chances of running a firm that lasts a long time, with you leading it, and enjoying the process more every year (versus a meltdown like this acquaintance)?

  • Don't Incur any Debt for Depreciating Assets. That pretty much leaves only a building, which can be a good investment under the right circumstances. Let us guide you down the right path.
  • Get Your Arms Around the Numbers. That might mean having the accounting person develop a dashboard that you can easily digest, but it should be your primary obligation. If you need guidance, there's an excellent source at hand.
  • React Quickly to a Downturn. The most important element is laying people off quickly, and all at once. No one has ever told me that they wish they had waited longer.
  • Craft and Live Consistently with a Strong Positioning for which you have very few competitors rather than the 48,000+ that a generalist firm does. The most telling test, here, is how long a current client takes to replace you if you lose the account.
  • Lead with Digital. That starts with your own website (start with this book). Hire another expert firm to build yours (it'll be cheaper and faster and more effective). From there, it means guiding clients on their digital strategy, because the other more traditional elements of marketing will flow downstream from that.
  • Prioritize the Selling of your Strategy at the outset of engagements. Better yet, wrap it into a diagnostic and quit worrying about whether or not you get the implementation work. Oddly enough, with that attitude you are more likely to get it because the client wants one throat to choke and because you've demonstrated that you "get" it.
  • Be Small and Nimble, flirting with growth only to the extent that clients will sense a deep bench. Otherwise grow like crazy, but ONLY because you want to be acquired by one of the big five holding companies. Which will have to be down the road, because Publicis is the only active player and they aren't spending much.
  • Depend Only on Your Paycheck. Tell yourself every day that the money you will make from your firm comes in the form of a regular paycheck and nothing else. If you can't pay yourself appropriately, fix it or quit and go work for someone else and shed the hassle and risk. I can tell you exactly how much you should make if you want to know.

What I'd Like You to Do

Call or email. There is no problem you are facing that I haven't seen. Admittedly, you'll have combined the issues into your own special form of dysfunction, but all the tools are in the toolbox and I'd love to help. That's why I'm here!

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